Sterling hits 26-year high ahead of BofE meeting

WayneMa

NEW YORK (MarketWatch) -- The British pound rose to a 26-year high against the dollar on Monday, bolstered by widespread expectations that global interest rates are moving higher at a time when there is again speculation that U.S. rates will be cut.

Declining U.S. rates would place the dollar at a disadvantage against its major rivals.

The British pound was last up 0.4% at $2.0176, setting a new intraday record.

The dollar was down 0.6% against the yen at 122.41 yen, while the euro was up 0.6% at $1.3623, approaching its all-time high of $1.3682.

Although the Institute for Supply Management's U.S. manufacturing survey performed slightly better than expectations, the dollar was unable to make any gains on Monday after the report showed an increased from 55.0% in May to 56.0% in June. See full story.

Market players remained more focused on last week's data than the ISM report. The strong selling of the greenback was partially due to last week's decline from 2.0% to 1.9% in the core personal consumption index year over year, according to Michael Woolfolk, senior currency strategist at the Bank of New York.

'The psychological view (of the dollar) has been negative.'
Michael Woolfolk, Bank of New York

Core PCE is the Federal Reserve's preferred measure for core inflation. See full story.

"The improvement (in inflation) bodes negative for the dollar," Woolfolk said. "It's one of the reasons why it's on the ropes."

Meanwhile, strong economic data from Japan, England and the euro zone indicated that interest rates likely will rise in these countries while the Fed's outlook could remain unchanged.

The Bank of the England is expected to hike interest rates a quarter-point after its Thursday meeting, according to the consensus on Wall Street. Meanwhile, softer U.S. economic data about durable goods, consumer confidence and personal income finally caught up with traders.

"The psychological view (of the dollar) has been negative," Woolfolk said.

Fresh dollar lows against the British pound and Canadian dollar in the past week have caused traders to set their sights on other currency targets, Woolfolk said. "The momentum is solidly against the U.S. dollar as speculative traders get close enough to break into a new trading range."

Although information about England's rate hikes were known in advance, the news and momentum "takes time to get around," according to Brian Dolan, chief currency strategist at Forex.com, a division of Gain Capital.

"Once the flows start moving, it inspires further flows and that brings in momentum players," Dolan said. "The pound has really started to take off."

The Independence Day holiday in the U.S., meanwhile, might be the "tip of the perennial summer doldrums period in currency markets," Woolfolk said.

Fewer traders around the holidays creates higher volatility in the markets, allowing a small group of traders to push currency movements up with large sells and purchases.

Elsewhere, the Bank of Japan reported overnight that confidence among Japanese firms came within expectations.

Large corporations indicated they intend to boost capital spending by 7.7% in the fiscal year that ends in March, below consensus expectations for an 8% rise. Confidence among smaller manufacturers fell to an index of 6, declining two points from March, the reports showed. See full story.

The Bank of Japan is expected to raise rates by a quarter-percentage point in August.

In addition, the European Central Bank, led by bank President Jean-Claude Trichet, is expected to lay the groundwork for interest rate hikes at its July 5 meeting, Dolan said.

"Trichet usually gives two meeting's notice," Dolan said. "(Traders) are slowly coming around to the recognition that the ECB is going to need to do two more hikes this year."

In other news, Turkey's currency and stocks rose Monday, boosted by higher-than-expected GDP growth in the first quarter as well as strong foreign demand despite the upcoming parliamentary elections. See full story.

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